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IBM Stock Is a Massive Trap Despite Earnings Boost

IBM analysts are trumpeting growth, but that's only thanks to its new mainframe

By Dana Blankenhorn, InvestorPlace Contributor

Can You Trust in IBM’s Nearly 5% Dividend?

Source: Shutterstock

International Business Machines (NYSE:IBM) rose 4% overnight as earnings beat estimates and analysts pounded the table for the stock.

“The pieces are falling into place”, one analyst wrote. Management doesn’t get “enough credit”, said another. “IBM rides new businesses to higher revenue”, profit said The Wall Street Journal.

Well, I hate to be Admiral Ackbar on this, but it’s a trap.

IBM has not turned around. IBM is not about to be great again. The evidence is right there in the company’s earnings release.

IBM Stock and Mainframe Profits

As I noted in a July 17 earnings preview, IBM’s growth is coming almost entirely from its mainframe business. The company rolls out new “big iron” every few years, and the transaction processors who need that throughput dutifully pony up the big bucks for it.

But that’s a short-term thing for IBM stock.

For the second quarter, IBM said its “systems revenue,” the mainframe business, rose 25% over a year ago. That’s good. But by this time next year, growth in that segment will disappear. You will have to wait for IBM’s next mainframe, assuming it’s worth the money, to see growth again.

Meanwhile, what about the rest of the business? Cognitive solutions, its software business, was flat year-over-year. Global business services, its outsourcing unit, was up 2%, but that was flat adjusting for currency. Technology services and cloud platforms, its cloud business, was also up 2%, but flat adjusting for currency.

There was some significant spin here. “Strategic imperatives revenue grew 26%,” the company said, “led by hybrid cloud services, security and mobile.” The whole unit was a $8.6 billion business for the quarter, and IBM said the good stuff in it had a “run rate” of $11 billion, but growth was buried by other sectors of the same business where revenues obviously fell.

Overall, net income was $2.4 billion, $2.61-per-share, on revenue of almost exactly $20 billion. This compared with net income of $2.33 billion, $2.49-per-share, and revenue of $19.29 billion a year ago. Free cash flow was $1.9 billion, but the company handed $2.4 billion to shareholders, $1.4 billion in dividends and $1 billion in stock buybacks. At the end of the quarter, there was $11.9 billion in cash on the books, and $45.5 billion in debt.

Not a Cloud Czar

If IBM were making steel, or selling cars, that would be a very good quarter. But IBM is a technology company. IBM claims to be a cloud company.

Compared to real cloud operators, the “Cloud Czars” like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com (NASDAQ:AMZN), those numbers are chicken feed. IBM is falling further behind the technology pack, and in tech you’re either a winner or you’re nothing.

IBM opened for trade July 19 with a market cap of about $133 billion. That’s just a little more than one-quarter of the market cap of Facebook (NASDAQ:FB), the smallest of the czars, which is worth $606 billion. It’s likely that the Czars are all overvalued. I’ve even called “bubble” on Amazon. 

But this is where IBM is at the top of the market. This is as good as it gets.

The Bottom Line on IBM Earnings

As I wrote earlier, IBM is purely a dividend play. Right now, its income is exactly equal to its payout, and higher than its cash flow. It’s a dowager trying to wear a miniskirt.

IBM is not growing, nor will it grow. It won’t even let itself grow, because it’s giving back all its earnings to the shareholders. Unless you’re an income investor and need that income, with its 4.35% yield, step away.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN and MSFT.

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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/ibm-stock-is-a-massive-trap-despite-earnings-boost/.

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